Chapter 5: Q29Q. (page 238)
What are some of the techniques of disclosure for the balance sheet?
Various techniques that are used for disclosure of balance sheet are as follow:
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What is the purpose of a free cash flow analysis?
The comparative balance sheets of Madrasah Corporation at the beginning and end of the year 2017 appear below.
MADRASAH CORPORATION | |||
BALANCE SHEETS | |||
Assets | Dec 31, 2017 | Jan 1, 2017 | Inc./Dec. |
Cash | \(20,000 | \)13,000 | \(7,000 Inc. |
Accounts receivable | 106,000 | 88,000 | 18,000 Inc. |
Equipment | 39,000 | 22,000 | 17,000 Inc. |
Less: Accumulated depreciation – Equipment | 17,000 | 11,000 | 6,000 Inc. |
Total | \)148,000 | \(112,000 | |
Liabilities and Stockholder’s equity | |||
Account payable | \)20,000 | \(15,000 | 5,000 Inc. |
Common stock | 100,000 | 80,000 | 20,000 Inc. |
Retained earnings | 28,000 | 17,000 | 11,000 Inc. |
Total | \)148,000 | \(112,000 |
Net income of \)44,000 was reported, and dividends of $33,000 were paid in 2017. New equipment was purchased and none was sold.
Instructions
(a) Prepare a statement of cash flows for the year 2017.
(b) Compute the current ratio (current assets ÷ current liabilities) as of January 1, 2017, and December 31, 2017, and compute free cash flow for the year 2017.
(c) In light of the analysis in (b), comment on Madrasah’s liquidity and financial flexibility.
EXCEL (Current Assets Section of the Balance Sheet) Presented below are selected accounts of Yasunari Kawabata Company at December 31, 2017.
Inventory | \(52,000 | Cost of goods sold | 2,100,000 | |
Unearned service revenue | 90,000 | Note receivable | 40,000 | |
Equipment | 253,000 | Account receivable | 161,000 | |
Inventory (Work-in-process) | 34,000 | Inventory (raw material) | 207,000 | |
Cash | 37,000 | Supplies Expenses | 60,000 | |
Debt investment (Short-term) | 31,000 | Allowance for doubtful accounts | 12,000 | |
Customer advances | 36,000 | License | 18,000 | |
Restricted cash for plant expansion | 50,000 | Additional paid-in-capital | 88,000 | |
Treasury stock | 22,000 |
The following additional information is available.
1. Inventories are valued at lower-of-cost or market using LIFO.
2. Equipment is recorded at cost. Accumulated depreciation, computed on a straight-line basis, is \)50,600.
3. The short-term investments have a fair value of \(29,000. (Assume they are trading securities.)
4. The notes receivable are due April 30, 2019, with interest receivable every April 30. The notes bear interest at 6%. (Hint: Accrue interest due on December 31, 2017.)
5. The allowance for doubtful accounts applies to the accounts receivable. Accounts receivable of \)50,000 are pledged as collateral on a bank loan.
6. Licenses are recorded net of accumulated amortisation of $14,000.
7. Treasury stock is recorded at cost.
Instructions
Prepare the current assets section of Yasunari Kawabata Company’s December 31, 2017, balance sheet, with appropriate disclosures.
Case 3: Deere & Company Presented below is the SEC-mandated disclosure of contractual obligations provided by Deere & Company in a recent annual report. Deere & Company reported current assets of \(50,060 and total current liabilities of \)21,394 at year-end. (All dollars are in millions.)
Aggregate Contractual Obligations
The payment schedule for the company’s contractual obligations at year-end in millions of dollars is as follows:
Total | Less than 1 year | 1-3 Years | 4 and 5 Years | More than 5 Years | |
Debt | |||||
Equipment Operations | \( 5,091 | \) 434 | \( 270 | \)775 | \( 3,612 |
Financial services | 31,692 | 9,962 | 11,477 | 6,578 | 3,675 |
Total | 36,783 | 10,396 | 11,747 | 7,353 | 7,287 |
Interest on debt | 4,777 | 609 | 1,069 | 745 | 2,354 |
Account payable | 2,743 | 2,611 | 90 | 39 | 3 |
Capital lease | 87 | 39 | 42 | 4 | 2 |
Purchase obligations | 3,007 | 2,970 | 37 | 0 | 0 |
Operating leases | 371 | 121 | 134 | 70 | 46 |
Total | \) 47,768 | \( 16,746 | \)13,119 | 8,211 | 9,692 |
Instructions
(a) Compute Deere & Company’s working capital and current ratio (current assets ÷ current liabilities) with and without the off-balance-sheet contractual obligations reported in the schedule.
(b) Briefly discuss how the information provided in the contractual obligation disclosure would be useful in evaluating Deere & Company for loans (1) due in one year and (2) due in five years.
(Balance Sheet Adjustment and Preparation) The adjusted trial balance of Eastwood Company and other related information for the year 2017 are presented as follows.
EASTWOOD COMPANY | ||
Adjusted Trial Balance | ||
December 31, 2017 | ||
Debit | Credit | |
Cash | \(41,000 | |
Accounts receivables | 163,500 | |
Allowance for doubtful account | \)8,700 | |
Prepaid Insurance | 5,900 | |
Inventory | 208,500 | |
Equity Investment (long-term) | 339,000 | |
Land | 85,000 | |
Construction in the process (building) | 124,000 | |
Patent | 36,000 | |
Equipment | 400,000 | |
Accumulated depreciation – Equipment | 240,000 | |
Discount on bonds payable | 20,000 | |
Account payable | 148,000 | |
Accrued liabilities | 49,200 | |
Notes payable | 94,000 | |
Bond payable | 200,000 | |
Common stock | 500,000 | |
Paid-in-capital in Excess of par – Common stock | 45,000 | |
Retained earnings | 138,000 | |
Total | \(1,422,900 | \)1,422,900 |
Additional information:
1. The LIFO method of inventory value is used.
2. The cost and fair value of the long-term investments that consist of stocks (with ownership less than 20% of total shares) are the same.
3. The amount of the Construction in Progress account represents the costs expended to date on a building in the process of construction. (The company rents factory space at the present time.) The land on which the building is being constructed costs \(85,000, as shown in the trial balance.
4. The patents were purchased by the company at a cost of \)40,000 and are being amortized on a straight-line basis.
5. Of the discount on bonds payable, \(2,000 will be amortized in 2018.
6. The notes payable represent bank loans that are secured by long-term investments carried at \)120,000. These bank loans are due in 2018.
7. The bonds payable bear interest at 8% payable every December 31, and are due January 1, 2028.
8. 600,000 shares of common stock of a par value of $1 were authorized, of which 500,000 shares were issued and outstanding.
Instructions
Prepare a balance sheet as of December 31, 2017, so that all-important information is fully disclosed.
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